The purpose of this paper is to compare the pre-acquisition performance of domestic and cross-border Indian target firms. Past studies suggest that foreign investors mostly acquire well-performing domestic firms, while domestic target firms invest more often in poorly performing firms. But in India’s case, this theory could differ due to the distinct factors impacting the relative costs and benefits, like the availability of cheap assets in India due to high bank NPA, the economic inefficiencies due to lack of technology and the capital-regulatory constraints. By studying 133 target firms, the study finds that foreign acquirers select those targets which have viable product line, good network, and large asset size with low cash holdings. On the other hand, domestic investors acquire those target firms which have high public holdings and generate handsome top-line products in comparison to their industry peers but struggle to convert this top line into a reasonable bottom line.

Description

Acquisitions are categorized as domestic acquisitions or cross-border acquisitions. Acquisitions where the acquirer and target firm operate in the same country are called domestic acquisitions, whereas cross-border acquisitions are those where the acquirer belongs to a foreign country and the target firm belongs to the home country.

While pursuing a cross-border acquisition, firms consider various country, industry and firm-level factors. Past studies show that cross-border acquisitions are motivated by the Market Entry Hypothesis (foreign company acquires efficient domestic firms) and domestic acquisitions in emerging markets serve as a market for Corporate Control Hypothesis (domestic acquirers invest in poorly performing local firms with a view to improving their productivity and competence). According to Zhu et al. (2010), target firms of domestic acquisitions in emerging markets underperform target firms of cross-border acquisitions in the pre-acquisition period. Fukao et al. (2008) conducted a firm-level study in Japan and found that in case of domestic acquisitions, Japanese firms tend to target inefficient domestic firms with high leverage ratio, whereas in case of cross-border acquisitions, foreign firms prefer well performing Japanese firms. According to Zou and Simpson (2008), industry size and profitability are among the key determinates of cross-border M&A over the past few decades in China. Moreover, intangible resources and intellectual capability favor more of cross-border acquisition activities into China. Blonigen et al. (2013) found that foreign acquirers prefer such targets in the domestic country that have maintained high efficiency and competency levels for several years prior to acquisition.